Riding Currents into New Markets: What Power Generation Developers and Contractors Should Watch Out For

The CPV St. Charles Energy Center, a new 725 MW combined-cycle gas power plant in Maryland, went online earlier this month. The U.S. Supreme Court analyzed federal preemption with respect to state regulation of power generation in interstate markets administered under the Federal Energy Regulatory Commission (FERC) in a ruling affecting the CPV plant’s rate structure. As the Court recounted, Maryland attempted to evade the “clearing price” set by the interstate market for power by ordering local power utilities to enter into a 20-year “contract for differences” with CPV for capacity generated by the new gas power plant. Under the terms prescribed by Maryland, if the clearing price set by the interstate market was less than the rate under the contract for differences, the power utilities would make up the difference, and, if the reverse were true, CPV would owe the power utilities for the difference.

Maryland’s aim was to encourage and subsidize local production of clean and renewable sources of electrical power generation, but the Court found that Maryland’s efforts at price fixing in the interstate market were preempted by the existing regulation of that market by FERC. However, the Court also left open the door for future efforts by states to incentivize local electrical production so long as such efforts avoided interference in interstate markets:

We reject Maryland’s program only because it disregards an interstate wholesale rate required by FERC. We therefore need not and do not address the permissibility of various other measures States might employ to encourage development of new or clean generation, including tax incentives, land grants, direct subsidies, construction of state-owned generation facilities, or re-regulation of the energy sector. Nothing in this opinion should be read to foreclose Maryland and other States from encouraging production of new or clean generation through measures “untethered to a generator’s wholesale market participation.” … So long as a State does not condition payment of funds on capacity clearing the auction, the State’s program would not suffer from the fatal defect that renders Maryland’s program unacceptable.

President Trump has promised to “identify and eliminate unnecessary regulations that kill jobs and bloat government” and to allow states more freedom from federal restrictions, although it is too early to determine if he will encourage renewables, in light of his promise to lift restrictions on coal, oil, natural gas, and shale. While FERC is unlikely to be affected, states will likely seek ways to persuade developers and contractors to the state’s backyard. As more states pursue markets for renewable and other forms of electrical generation, they are likely to implement incentive programs to try to attract developers and contractors to produce capacity locally. Power generation developers and contractors must consider the potential enforceability of any regulatory or rate-setting scheme that is used to entice them into a new market. If a state overreaches in the development of its incentive program and a court strikes the program down after a project is under way, that action might substantially impact the profitability and viability of any power plant.